By Giovanni de Briganti
PARIS --- The aerospace industry on both sides of the Atlantic is having to confront an uncomfortable reality: the same customers that sign contracts and pay its bills want, at some point, to take delivery of the aircraft they’ve ordered. And they tend to make waves when this doesn’t happen.
Because they lost sight of this, Sikorsky, Bell Helicopter and others have become embroiled in the same downward spiral of missed deadlines, quality control failures and mounting losses that have hit Airbus and EADS, its corporate parent.
Last week began with EADS delivering another unexpected shock to investors by issuing its third profit warning in less than 12 months. It also revealed that its 2006 results would be hit by “certain one-time charges in relation to settlements with customers” for delays in A380 deliveries, and that “additional A380 charges not originally envisaged could apply.” All this stems from the failure by the past management of Airbus to catch and fix cabling and other production problems in its A380 production line.
And the week closed with Thursday night’s surprise announcement that Bell Helicopter CEO Michael “Red” Redenbaugh had abruptly “resigned” on the same day that Textron, Bell’s corporate parent, was forced to reveal that it had “incurred additional costs related to its Bell Helicopter H-1 program during the fourth quarter of 2006.” And, while Bell did not mention any problems with the US Army’s Armed Reconnaissance Helicopter, the industry is rife with rumors that the US Army is so incensed with development delays and delivery postponements that it might cancel outright the $2.2 billion contract it awarded in July 2005.
The cause of Bell’s problems appears to be a lack of sufficient internal controls that allowed H-1 cost to soar even as the program slipped behind schedule. This is also the root of Airbus’ problems with the A380, and of Sikorsky’s ongoing feud with the Pentagon. This last quarrel came to a head in November, when the Defense Contracts Management Agency (DCMA) complained to Sikorsky CEO Jeffrey Pino that "management oversight is out of control and is driving quality" problems in UH-60/S-70 production "that are mounting in seriousness." The DCMA demanded “immediate action to mitigate the mounting risk.”
Delivery slippages are also affecting the European NH90 program, where a combination of delays in receiving government-furnished equipment and unexpected complications in integrating the complex mission equipment packages specified by customers combined to push back initial deliveries by two years. And Eurocopter, one of the NH90 partners, has announced plans to hire over 1,200 people to boost its production capacity and avoid delivery delays. Production issues are becoming common throughout the industry.
None of this should have caught managers unaware, since order books for both military and civil aircraft have been swelling for several years, while little investment has been made in expending production capacity.
Many observers see these management failings as the result of the aerospace sector’s transformation from a product-driven to a profits-driven industry. Top management is forcing line managers - the ones actually responsible for production - to focus on cost-cutting to boost profitability, since today’s shareholders - who increasingly want short-term profits – look to the bottom line, and only to the bottom line.
This is why so few of today’s aerospace CEOs have backgrounds in production, and so many in marketing, finance and business or public administration. In fact, only four of the top ten companies in the Defense News 2006 Top 100 list are led by graduate engineers - and even then two of them served as chief financial officers at some point in their career. Five others originally graduated in administration, one as an accountant and one as a lawyer. (The total is 11 since EADS has two co-CEOs). Clearly, remaining an engineer is not the route to the top of the aerospace industry’s corporate ladder.
Another factor pushing for “short-termist” management is the aerospace industry’s unending consolidation. Today’s industry is made up of far fewer, much larger companies than ever before, which require more capital than ever before – witness the $12-13 billion cost of developing the Airbus A350. Such huge amounts can only be found on the financial markets, where profitability is the crucial criterion for credit-worthiness, so financial performance becomes the over-riding goal for CEOs.
Also, managing a company with 100,000 or 150,000 employees and dozens of product lines requires a far different set of skills than managing smooth production of capital goods.
However inevitable it may be, this disconnect becomes a major handicap when a company’s survival depends not on keeping investors or lenders happy, but on delivering contractually-compliant products to customers, on time and on cost.
But is there any time when it doesn’t?